March 16, 2005

The rise of LN Mittal - lessons for investors

LN mittal has been in limelight for quite some. He is now in limelight for being the third richest person in the world. everyone seems to be focussing on his networth. I am more interested in how he got there

i have read about him in the past and read about him in an article in the economic times. His key skill is in identifying bankrupt , beaten down steel plants / companies . He is able to value this company correctly and acquire it at that price ( in may cases the owner or goverment is desperate to offload it ). He then proceeds to turn it around and make it profitable.

By applying this strategy across the globe in various situations, LN mittal has been able to build an empire , cut cost and initiate consolidation in this industry.

The following comes to mind on seeing this happen

- A company in the commodity industry can have a sustainable competetive advantages from two sources - superior management and enduring low cost position ( which is also dependent on a superior management )

- Consolidation in a commodity industry improves the profitability of the top firms as it gives them better pricing power.

- mittal steel it seems also is vertically integrated in ore and coke ( two key raw materials ). So with horizontal consolidation, he is also vertically consolidating. This gives him better pricing power.

- He is expanding into new geography and trying to closer to demand ( China / India etc ). This will give him flexibility in the future to manage demand fluctuations. Other companies across the world are restricted to some geography and so if the demand drops in that region , they are in deep trouble.

What is happening also highlights another point of the importance of a good management for commodity industry. Bad managements in the steel industry have run their companies aground and have been in red for quite some time. Recent demand surge and firm prices have given them a lease of life ( and they are promptly started increasing capacity ). Lets see how they manage the next downturn.

LN mittal's story has been a live case study for me see how a superior management can make a difference even in a commodity industry ( and that too as bad as steel ). vice versa a commodity industry cannot tolerate bad management ( a franchise company like FMCG can for some time )

That he is an indian is beside the point. The sad part is we are happy that an 'indian' has made it !! sad because , he could not have achieved it in india ...he had to leave the country to achieve his ambitions. Hopefully in the future we will not force such people to look outside the country and would provide the atmosphere within the country

1 comment:

Prasanth said...

What do you think of his Arcelor bid? Don't you think that he is over leveraging himself by committing not to cut labour etc?